Home Equity Loans: How to Ensure Qualification

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When it comes to turning assets into cash, there are numerous methods that financial advisors will point to. But these can be complicated at times, leaving us bamboozled and confused. But when turning the value of your home into hard cash, the process is relatively easy. It comes down to a home equity loan from your lender.

Of course, there are risks involved and facets that need to be paid careful attention to. Simply getting loan approval is only part of the task; being able to repay them over a long period of time is the trick.

This is the core point that lenders look at, and as long as method and affordability are confirmed, then approval of home equity loans despite bad credit is practically assured.

Reliable Income

No prizes for guessing that having a reliable income is one of the most important factors in getting a home equity loan, as well as any other loan. The equity available from any particular property is not enough to sway a decision in favor of the applicant. After all, the loan must be repaid month-by-month.

The best way to prove a reliable income is to provide statements from an employer confirming a full-time contract, while a history of bank deposits can also be useful. But remember that providing proof of a reliable income is only half the battle when getting loan approval.

The amount of available income is arguably just as important as having a reliable source. The typical monthly obligations, like utility bills, credit card debts and existing loan repayments affect the amount of money free to commit to repaying a new loan. A home equity loan, despite bad credit, is possible but difficult if existing commitments are high.

Loan to Value Ratio

This is one of the most important calculations when buying a home, and is used when assessing the size of a home equity loan. It comes down to the percentage of the overall market value of the home compared to the amount of debt that is still tied to it. Often, when buying a home, a lender states that 80% of the LVR is available as a mortgage, leaving 20% to secure by other means - usually as a down payment.

Getting loan approval is not particularly difficult when equity is provided as security, but it is important to assess just how much is available to use as collateral. For example, a home bought with a mortgage of $100,000 may have increased in value to $150,000 over 10 years. Mortgage repayments may mean that debt owed is now $65,000, with $35,000 freed up.

What this means is that the overall equity available on the home is $85,000, though an LVR of 20% may place a limit of $30,000 (20% of $150,000). This is a significant amount of security to possess, which is why getting home equity loans despite bad credit is so straightforward.

A Good Credit Score

The importance of having a good credit score is not quite as significant as many people believe. A high score will always be welcomed by lenders, but even a low credit score will not stop an applicant getting a home equity loan. However, it does have an influence.

A low score will mean a higher interest rate will be charged, and this pushes the monthly repayments higher. This can mean that the deal becomes unaffordable, which depends in turn on the amount of available income there is. So getting loan approval can be harder.

For this reason, it is worth taking a look at your credit report and examining how best to improve the credit score. It is certainly possible to get approval on home equity loans despite bad credit, but there are complications.